As I write this blog post on Thursday afternoon, I have thirteen offers on a listing for a piece of land that has a dilapidated house on it. Make no mistake: this sale is for the land. We are selling this property in as-is condition with no representations or warranties.
And yet, there are still thirteen offers…
The real estate market is alive and well, but to many, this is a problem. Housing affordability is almost an oxymoron in 2021, and the media has been obsessed with real estate over the past couple of months.
Real estate auctions, bidding wars, letters to sellers, “blind bidding,” the mortgage stress test, and interest rates are just a few of the topics that have been explored over and over.
And sometimes, the media covers topics that are far from timely:
Thursday, May 13th in the National Post: “GTA Buyers Waiving Home Inspections En Masse”
Welcome to 2009.
With respect to the author, the newspaper, and the individuals profiled in the article, this is nothing new.
I’m not writing blogs discussing the war that was fought in Europe between 1939 and 1945 because I try to stay current.
I realize that not everybody in the market is as informed as the TRB readers, so yes, I’m being a bit of a jerk here. But as I pointed out last week, some headlines are downright wrong, and ones like the headline above are bringing to light business practices that have been around as long as I’ve been in this business.
Nevertheless, there’s a lot of talk about the market, rising prices, and “what to do about it.”
We discussed this at length last month in these two posts:
It’s really, really interesting to see how different individuals, businesses, or industries feel housing affordability should be dealt with.
Here’s a letter that TRRREB sent to Jeremy Rudin at the Office of the Superintendent of Financial Institutions (OSFI) earlier this week as it pertains to proposed changes to the mortgage stress test:
Dear Mr. Rudin,
On behalf of the Members of the Toronto Regional Real Estate Board (TRREB), I would like to thank-you for the opportunity to provide input to the consultations on the minimum qualifying rate for uninsured mortgages.
As REALTORS®, TRREB Members are also Members of the Canadian Real Estate Association (CREA). As such, TRREB supports and echoes the input that has been provided by CREA on this issue. In particular, while it is important to monitor economic conditions and ensure responsible household debt, it is also important to ensure that measures, such as the B-20 guideline implemented by the Office of the Superintendent of Financial Institutions, do not have unintended consequences.
With this in mind, we support CREA’s recommendations to review the mortgage stress test to ensure the realities of local real estate markets are taken into consideration and to remove the stress test from mortgage renewals, for the following reasons:
- adjusting the stress test to make it more regional in nature would reflect the realities of each real estate market across the country;
- a regional test could better reflect market conditions by considering factors such as housing market activity, average cost of a home in that market, employment levels, average income and cost of living in the area;
- there is precedent for national programs to be tailored to address regional socio-economic factors (e.g. Employment Insurance Program, First Time Home Buyer Incentive); and,
- because the stress test applies to existing mortgages, many borrowers end up remaining with the same lender at the time of renewal, rather than seek more competitive rates.
TRREB also believes that transparency is important with regard to the stress test. In this regard, it is important that OSFI clearly communicate its process and rationale for establishing the minimum qualifying rate. This would allow people to anticipate future changes to the guideline and would help to provide more informed feedback to OSFI.
TRREB appreciates federal efforts to ensure the health of the Canadian economy and real estate markets, but it is important to ensure that these efforts do not have unintended consequences, as noted above. We look forward to continuing to work with OSFI and the federal government to help ensure as many Canadians as possible can achieve the dream of home ownership.
A cynic will suggest that it’s no surprise TRREB, along with CREA, are fighting a tightening of lending regulations in Canada.
Personally, I think tightening the stress test does nothing to stop houses from appreciating, and everything to ignore top-down issues in our country, province, and city. But those thoughts were flushed out in the two blog posts from last month (links above), so we won’t beat that dead horse any further into oblivion.
At the same time that some lobbyists want to make it easier for buyers to enter the housing market, it seems others are hoping for the opposite.
Case in point, the following article in this week’s Financial Post:
“Canadians Are So Anxious About The Blistering Housing Market They’re Open To Rate Hikes To Cool It”
Ari Altstedter & Erik Hertzberg
May 12th, 2021
Canadians are so alarmed by the red-hot housing market that many say they’d like to see the central bank raise the cost of borrowing to dampen demand for real estate and stabilize prices.
About 70 per cent of Canadians responding to a new Nanos Research poll conducted for Bloomberg News said the sharp increase in home prices was a major problem for the economy. Almost half were at least somewhat in favour of the Bank of Canada raising its overnight rate to slow the rise, even though such a move would also increase the cost of credit lines, credit cards and other debt.
The numbers underscore how soaring housing costs have emerged as a major issue in the public consciousness after a year in which prices jumped by 30 per cent or more in some regions. Economists at major banks have called on the government to act to reduce demand. At the same time, the Bank of Canada has made it clear it won’t raise rates until the economy absorbs its excess capacity — a milestone projected for 2022 at the earliest.
“Even though there is no consensus, the fact that one in two Canadians are good with a rate hike speaks to the appetite to cool down a hot housing market,” pollster Nik Nanos said.
Those sentiments are prompting some anxiety for Canadians — including some homeowners whose own fortunes are rising with the real estate market.
“I own a place, but I also have a son too. When I think about my son, it’s like, how is he going to survive in this world?” said Raymond Wong, a Vancouver engineer who filed a petition with Canada’s parliament saying the central bank should consider house prices when setting interest rates. “He can do everything right, do everything by the book, get an education, but at the end of the day he won’t be able to afford anything.”
The Bank of Canada’s long-standing position has been that it should be the last line of defence against threats to financial stability, as its focus is on other priorities, like maintaining healthy inflation and output growth.
Most economists say it’s still too early in the recovery for the central bank to hike rates, and it’s not clear that the survey respondents who favoured raising rates took full account of the broader effect of higher borrowing costs.
Still, Canadians’ growing alarm at the recent surge in home values could present a political problem for Prime Minister Justin Trudeau. The government has options other than raising interest rates to slow the housing market, like taxes and regulation, but has refrained from using them for fear of angering homeowners.
The widening gulf between Canadians with property and those without has some vocal critics casting the issue as a battle among classes or generations.
And like so many modern revolutionaries, Canada’s housing discontents are congregating on Reddit. On a subreddit called r/canadahousing, about 8,500 members share memes, post news articles and discuss what they refer to as Canada’s housing crisis.
The Redditors are also organizing. Using the proceeds from a GoFundMe campaign, they recently rented two billboards to be put up this week in Toronto and Ottawa. The Toronto one will say, “Can’t Afford a Home? Have You Tried Finding Richer Parents?” while the Ottawa will read, “Homes Aren’t For You. They’re For the Rich. You Can Rent.”
“We’ll be the generation that can never retire because of housing prices. The barrier to entry has never been higher,” said Greg Murray, a 33-year-old corporate strategy executive who was a spokesman for the Reddit group. (A few days after Bloomberg spoke to Murray, he stepped away from the group.) “Our government is not even admitting it’s an issue, they’re not even acknowledging it at this point, and that’s what we’re fighting to raise awareness of.”
In Canada as in the U.S., home ownership has long been seen as essential to securing a place in the middle class, prompting Canadians to own their homes at one of the highest rates in the world. The home ownership rate in Canada is roughly 69 per cent, compared with 65 per cent in France, 63 per cent in the U.K. and 61 per cent in Japan.
The Trudeau government has said it’s particularly focused on helping first-time homeowners get into the market, but so far most economists think the steps taken — including a 1 per cent tax on non-resident homeowners and funding for affordable housing — are unlikely to make up for the ground lost by prospective homebuyers in the last year.
As a model for alternative policy, the Trudeau government’s critics point to New Zealand, which, faced with a similar housing boom over the past year that was induced by low interest rates, introduced a tax specifically targeting speculation. The government also instructed its central bank to consider housing when setting monetary policy.
Canada’s housing agitators often portray the issue as a conflict between the old and the young, and the propertied and the property-less. But the Bloomberg survey, conducted from April 29 to May 3, suggests that may not be the case. Even though 18 per cent of respondents 18 to 34 said they “support” increasing interest rates to slow the rise of housing prices, compared with 13 per cent of respondents over age 55, the older group was even more likely than the younger group to say they “somewhat support” an increase.
“I think it’s pretty clear to most people that housing in this country is all but out of control,” Benjamin Reitzes, a Canadian rates and macro strategist at BMO Capital Markets, said by email. “While it’s nice to have an appreciating asset, it makes moving to the next home that much more expensive. In addition, for those with kids, it makes you wonder how they’ll be able to afford a home if this continues.”
On the one hand, you have organized real estate suggesting that it would be unfair to certain segments of the buyer pool, depending on demographics and geography, to further tighten the mortgage stress test.
On the other hand, the general public wants interest rates to increase so that, apparently, they can afford to buy real estate.
Have you ever witnessed such a confusing time?
I don’t even know where to start analyzing how the public thinks that higher interest rates will help their affordability. Each of those hoops to jump through comes with several steps, each step has a caveat, each caveat has a red flag, and so on.
But one thing is for sure: the conversation is not going to die down.
As it pertains to the discussion here on TRB, I’d love to hear your collective thoughts on whether raising rates or loosening the mortgage stress test are options that should be on the table…